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spk03: Hello everyone and welcome to CEDRAL's Q4 2022 earnings call and webcast. My name is David Warwick and I'm the Director of Investor Relations for the company. I'd like to start by introducing you to the CEDRAL team on today's conference call. Simon Johnson, President and Chief Executive Officer. Grant Creed, EVP and Chief Financial Officer. Leif Nelson, EVP and Chief Operating and Technology Officer. And Sameer Ali, EVP and Chief Commercial Officer. I will shortly hand you over to Simon, who will take you through an overview of the Q4 highlights, as well as touch on some of our corporate and commercial success over the quarter. Grant will then take you through our financial performance over the quarter and 2022 performance against our previously set guidance before handing back to Simon for some closing remarks, summarizing our strategy and outlook. Following the formal presentation, we'll be inviting questions from industry and sell side analysts. To participate in the Q&A session, we ask that you join the session via the conference call line. For those of you that are not tuning in via the webcast link, you will be able to access a copy of this presentation via the investor relations section of the CEDRAL website. This conference call is being recorded and a webcast replay of the call will be made available on our website shortly after. Before we commence, I would like to notify you of the disclaimer statement made on slide two. Simply put, we will be referring to forward looking statements related to the business and company that are not historical facts. Such statements and assumptions are based upon current expectations and are therefore subject to certain risks and uncertainties. There are many factors which could cause actual performance and results to differ materially. For further information, please take the time after the call to read this disclaimer and refer to the Q4 earnings report released earlier this morning. On that note, I will hand you over to Simon.
spk00: Welcome, everyone. Thank you for joining our virtual presentation today to discuss our Q4 2022 results. At the outset, I'd like to briefly clarify that, as outlined in our press release on 28 February in connection with filings made for our acquisition of Aquadrill, we chose to postpone this earnings release as a critical step in closing that transaction in the most expeditious manner. Therefore, with our Q1 2023 reporting scheduled for just over a month's time, we've shortened today's prepared remarks. Now to a few top line figures for the quarter. Full year EBITDA for 2022 was 265 million, which is at the top of the guided range. Fourth quarter revenues in EBITDA were lower than previous quarters, but this was anticipated and in line with expectations in relation to operating activity. In October, we closed our sale of seven jackups located in the Kingdom of Saudi Arabia, which allowed us to increase our liquidity and significantly deleverage our balance sheet. Since the transaction closed, we've paid down almost $600 million in debt under our second lien facility. Grant will provide some more colour on these topics in his prepared remarks. During the quarter, not only did we close our sale of the Saudi jackups, but we also signed an accretive agreement to acquire Aquadrill, a business with which we're very familiar, given our common history. And as you all have seen, just days ago, we closed this transaction. The management team and I would like to thank the employees of both companies for their efforts and contributions in closing the deal. Our ability to transact quickly and efficiently is becoming a hallmark of the Sea-Drill brand. We're very excited about the prospects this acquisition presents in today's buoyant rig market. Turning to our active fleet, including the former Aquadrill units, we now have 14 deepwater and harsh environment motors in operation, with the West Capella expected to begin its operations offshore Eastern Africa imminently, taking the total in operation to 15. Among the operating units are the West Jupiter and the West Talus, which have commenced operations with Petrobras in Brazil in December and January, respectively. Additionally, we have three benign environment jackups operating on bare boat charter to our Gulf Drill joint venture and a number of other units that we manage on behalf of other owners. As a reminder, the former Aquadrill units are not presently managed by Sea Drill, but our intention is to take control of these units at an appropriate time based on discussions with the existing managers, as well as the customers utilizing the services of these rigs. Finally, during the final quarter of 2022, we delivered good operational performance with high technical utilisation across the fleet. Our technical utilisation was recorded at 95%, while economic utilisation stood at 91%. Moving on to the next slide, the most notable event of recent months was our acquisition of Aquadrill, which we closed just a few days ago, as I previously mentioned. As a result, we've added four drill ships, one harsh environment semi-sub and three tender assist units to our fleet. With the sale of the seven jackups deployed in the KSA and the addition of Aquadrill assets, our fleet has become more exposed to the attractive ultra deepwater and harsh environment rig segments. The Aquadrill deal provides Seadrill with more open capacity in the ultra deepwater rig market in particular, where we continue to be encouraged by prevailing trends and day rates. Importantly, this capacity is on the water and does not require costly and lengthy rig reactivations. Our immediate focus is on seamlessly integrating Aquadrill into our business and we believe that we are uniquely positioned to do so given the shared history of Seadrill. We are very keen to move quickly with the integration in order to realise the significant synergies arising from the transaction and the management team firmly believe that the acquisition cements Seadrill as an industry leading offshore driller with critical scale. It enhances our free cash flow outlook and we expect it to deliver meaningful value to our shareholders through time. Now touching on market conditions on slide 5, 2022 was an inflection point for the offshore drilling industry and we continue to see positive developments right across the oil and gas sector. The fundamentals for offshore drilling remain favourable despite turbulent conditions in broader financial markets of late. The global energy crisis experienced through 2022 has brought to light the years of underinvestment in new and continued supplies of energy. EMPs have benefited from high energy prices for some time now and chosen principally to return the profits to shareholders. However, we are now seeing an emerging trend in their approach to capital allocation. Several of the large ISCs have indicated expansionary budgets for offshore drilling activities, with greenfield activity being a prominent beneficiary. Furthermore, we are seeing a clear preference towards high-end modern equipment, which plays well into the hands of CEDRAL's developing fleet. Strong demand is particularly evident in CEDRAL's key geographies, mainly Brazil and West Africa, where utilisation rates are being pushed to higher levels. While demand is a key driver, we believe that the lack of available supply of rigs, a function of fleet rationalisation over the last decade, to be a critical component of the market's continued positive momentum and trajectory through 2023 and beyond. The outlook for the benign ultra-deep water segment remains positive. with marketed utilisation standing around 95% for drill ships. The health of this segment is illustrated by leading-edge day rates, consistently in the $400,000 to $450,000 per day range. We now have two units in the harsh floater segment. Several units have already left the critical Norwegian market, and we see the demand-supply balance tightening further in coming months, improving outcomes for rig owners. With our expanded rig portfolio, we are well positioned to capitalise on new opportunities, We're excited about the market in the coming years and intend to reposition Cedral relative to its peers with a more consistent and concentrated fleet profile. I'll now hand over to Grant to talk you through the Q4 financial results in more detail. Over to you, Grant.
spk04: Thank you, Simon, and welcome again to all of you joining us today. We're delighted to report full-year EBITDA for 2022 of $265 million, which is at the top end of the guided range. Full year revenue of $1.1 billion and capex of $289 million were also within the guided ranges. Fourth quarter EBITDA of $41 million was in line with expectations and previous guidance, but lower than the previous quarter, primarily driven by idle time for the West Telus, which completed upgrades for its upcoming long-term campaign with Petrobras that commenced in early January 2023. Fewer rig operating days for the West Hercules, which concluded its operations in Canada and subsequently demobilized to Norway. And we did not benefit from a full quarter of operating results from the Saudi jackups following completion of the sale of that business in October. And I have a general comment in respect of P&L geography. Results related to the Saudi jackup business up until October 18 are presented as discontinued operations on the face of the income statement. And my final comment regarding the P&L, we expect EBITDA to significantly improve again in the first quarter of this year as we benefit from a full quarter of operations in respect of all four drill ships on contract in Brazil. Now onto the balance sheet. We had $480 million of unrestricted cash on hand at the quarter end, relatively high due to the proceeds received on sale of the Saudi Jackup business. Other assets decreased by $89 million, largely due to a combination of collections from Sonodral JV in respect of management fees receivable, amortization of favorable contracts, and receipt of demobilization revenue in respect of the West Hercules. Long-term liabilities decreased, both primarily in relation to debt prepayments, which I'll explain in more detail shortly. This was partially offset by mobilization revenue earned in relation to Jupiter, Carina, and Saturn, which is recorded on the balance sheet and recognized as income in the P&L over the firm contract term. And finally, assets and liabilities related to the Saudi business were classified as held for sale on the Q3 balance sheet. These were no longer on the balance sheet after the sale closed in October. Looking at our debt profile in a bit more detail, you'll see that we've been very proactive managing it following the sale of the Saudi business. Since the end of Q3, we reduced our debt stack by almost $600 million. First, we made a mandatory prepayment of $192 million in October at the closing of the sale, which was followed by a voluntary prepayment of $250 million in November. Post-period, we made two further voluntary prepayments of $110 and $40 million in February and March, respectively. All told, these prepayments have reduced the relatively expense of second lien debt by approximately 83%, from $713 to $117 million. With no change to the first lien facility or convertible bond, our total debt stood at $342 million as of April. Lastly, on the financials, we will not be providing full year 2023 guidance at this point in time. Our priority is providing consolidated financial guidance that includes the aqueduct business, and we intend to issue this in the near future. With that, I'll now hand back to Simon before we open the line for the Q&A.
spk00: Thanks Grant. We have of course spoken about many of the events on this slide previously, so I won't touch upon all of them individually. now that we've concluded 2022 results i'd like to reiterate how proud i am of our organization it was an extremely active year that began with our successful emergence from chapter 11 and ended with the announcement of the aqua drill fleet returning home we've demonstrated that we're decisive and nimble through the execution of several strategic initiatives while at the same time delivering operationally for our clients and on the topic of operations i'd be remiss if i didn't commend our workforce both onshore and offshore for getting our four seventh generation drill ships operational in Brazil after large and time consuming capital projects. We've started this year in similar fashion with the Aquadrill closing just days ago and the divestment of our stake in Pridus Energy back in February. We are making Sea-Drill a simpler, more streamlined company, increasing our concentration on the markets and rig segments where we can realise the most value for our shareholders. Looking ahead, refinancing outstanding debt will be a near-term focus and we'll continue to monitor the market for accretive growth opportunities and or divestment of non-core assets where attractive prices can be realised. We will continue to be an active player in our industry and, as ever, we intend to maximise value for our shareholders with operational excellence and safety at the forefront of our business. And with that, we conclude our presentation. Operator, I'll hand you back to open up the lines for Q&A, please.
spk01: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Greg Lewis from PTIG. Your line is open.
spk06: Yeah, hey, thank you, and good afternoon, everybody, and thank you for taking my question. Simon, you know, I believe you touched on it briefly in your prepared remarks, but it seems like You know, over the last couple weeks, there's been some positive momentum in the North Sea, whether it was, you know, the U.K. announcing they're going to look at the windfall tax or, you know, it looks like a rig or two has moved out of the Norwegian market to outside the North Sea. Just kind of curious on your thoughts, how you're thinking about that market, realizing post the AquaDrill acquisition, you have another harsh weather rig and really just You know, could you provide a little bit more colour in how you're thinking about that market, maybe in the back half of this year, and really how you're thinking about it next year?
spk00: Yeah, you bet, Greg. I'm happy to talk to that. So, yeah, I mean, obviously, Aquadrill delivers another harsh environment rig into our fleet in the form of the Aquarius. You know, we have been saying for some time that, you know, we are concerned about being, you know, sub-desirable scale in that market segment. So, you know, that gives us, obviously, we're getting closer to critical mass, which is a good thing. And it's empty capacity at the moment, too, in as much as, you know, the rig's not currently working for anyone. So, as we see the, you know, the shift of certain of the units from the NCS to southern latitudes, We see that as marking an important shift in the market balance in the NCS certainly, but I think more generally in the Western European rig markets. We think that the public policy that's been expounded by the UK government in relation to our sector has not been helpful in the near term. I think that there's more sensible ideas that have been brought to the fore now, but I don't think they're going to make as important a contribution to the supply demand balance in the near term as the movement of some of those units to other countries like Australia, Canada, Namibia, I think that's the most powerful near-term impact or catalyst on the development of that market from what's been a little bit of a stale and depressed outlook. That's rapidly changing to one where there's a much healthier balance between demand and available supply. You know, we think we're favourably exposed. We do have to go undergo a reactivation for the Aquarius to bring it back to work. Our view is that that reactivation will need to be funded by the client. So we're setting the threshold pretty high in terms of putting that rig back into a market that, you know, needs the attributes of that rig. And as I say, we're going to be strictly observing financial prudence in how we approach those opportunities.
spk06: Okay, great. And then realizing that it's been a week, so you probably haven't even started realizing synergies from the AquaDrill acquisition, but with that transaction closed, how are you thinking about positioning the company around potential additional opportunities for rig growth, whether that's on the more traditional M&A side, or it looks like there are still maybe one or two stranded new builds at the shipyards, and maybe a couple more that I'm not thinking about the right way, and or is there potential for Sea Drill to potentially manage maybe some of those rigs that are currently looking to come out of those shipyards?
spk00: Yeah, well, look, what I would say is, you know, we've probably taken a more wide-ranging approach to how we might sort of, you know, make money through the business. Rig management has been a feature of what we've done in the past. It's not at the core of what we do, but certainly we would be interested in participating in rig management opportunities for those new builds, I think, critically, if there's a path to ownership of the asset. I think as, you know, the... the stranded asset inventory starts getting depleted. You know, obviously there's more and more people chasing, you know, fewer and fewer available units. So I think as you think about the supply inventory generally, it's, you know, it's getting very, very tight now. So I think whereas, you know, we've been principally focused on acquiring balance sheets up until now, I think that, you know, we would have an open mind to acquiring the stranded asset as long as we have a, you know, you know, pretty high level of confidence of our ability to contract that unit. So sort of I've answered your questions in reverse there, Greg. But I think also additionally on top of that, obviously, you know, the Aquadrill acquisition just, you know, gives us a lot more options for our customers and a lot more sort of near-term capacity as well. So, you know, the market is getting into a really interesting phase at the moment. And, you know, we're super excited Super pleased with how things are developing for us in the space generally.
spk06: Yeah, 100% we agree. I did have one other question. I'll try to sneak in. Graham, you mentioned the step up that we're going to see in Q1. I don't know how granular you want to be, but is there any kind of guidance you can give us and maybe on a percentage basis or how just so there maybe isn't any confusion? How many incremental revenues do you think we're going to see roughly in Q1 versus Q4?
spk04: Greg, I'm reluctant to give you anything sort of firm in that respect. I think, you know, what I can say now is, as I mentioned in the prepared remarks, the Brazil rigs are on contract. So for folks to go and run their models, it's not extremely, it's quite a simple business. And you know what? Rigs are on contract. I think generally the market has a good idea of the day rates on each of the rigs. So I think you'd be able to get pretty close.
spk06: Okay. Great. All right. Thank you very much for the time.
spk01: Thanks for the questions, Greg. Our next question comes from Frederick Sten from Clarkson Securities. Your line is open.
spk02: Hey, Simon. I'm on the team. Congratulations on the transaction, first and foremost, and that goes to you, Stephen, as well, if you're listening in here. I think it's great to see consolidation.
spk00: Thanks, Fredrik.
spk02: My question, or I have several questions, but I'll try to keep it short here. I guess, you know, you said briefly that in the near term you could look at your capital structure and particularly on the back of you reducing the second lien piece I guess kind of grouping that maybe into a simpler structure would make sense so are you able at this point to share not necessarily specifics but at least an idea of how you think that could look like and if you have any ideal leverage level that you would
spk04: uh look at as well yeah yeah so it's sort of by saying that uh existing debts uh not only is it uh more expensive than we would like it to be and think where the market is today but also contains unhelpful complex covenants that we would like to uh to remove so so i think a refinancing of some sort does make sense and and we've been doing our work to review what are the pros and cons of the options we see in front of us. We weigh up Norwegian bond, US bond, direct lenders. I can't go into details now of where we're landing and what the leverage metrics are. I think we also look at use of proceeds as well and what that may be. But I'm reluctant at this stage, Frederik, to give you any more details on that.
spk02: Yeah, that's very understandable. I think on this transaction or potential strategic transactions, you touched upon that with Greg already. But just on the broader markets, given that we're now seeing these stranded assets being taken into market, and I think quite a few of them or almost all of them have soon-to-be owners or companies that are looking actively to take out the rest. And then you have some of your peers that are still, in addition to yourself, that are still stacked with stacked assets, which I think at least some of them are keen to put back into work. So when you put that all together, how do you think the day rate mechanics will kind of work out in the short term versus the longer term? Do you think we'll, you know, meet some sort of plateau as we kind of churn through those assets or and then accelerate a bit more? Or do you think we will have positive directional momentum also through 23, 24, regardless of those stacked assets coming back into play?
spk00: I think in the near term, Frederick, our expectation is that you may see something of a plateau in the rates, but that's principally a function of market participant behaviour. I don't think it's necessarily reflective of underlying fundamentals. We're firmly of the view that the supply-demand balance is what it is, and that at some level will just drive behaviour. forward regardless of what people may choose to do with individual market fixtures and so on. So I think there's potential for a slight increase in the spread and a flattening of rate development here in the next couple of months. But I think as we get into the capital budgeting season in the next quarter and we start to see that tightening the supply in terms of the units that are stranded in the shipyards disappearing, then I think you're going to end up with two camps. There are going to be those who have a capacity that they can't get to work because they're facing long and expensive reactivations. And then they're going to be those with rigs on the water. And so I think for those with rigs on the water are going to be the pace setters in terms of rate development. And those have to bring units back to work. They'll face, frankly, an arbitrage. And that arbitrage will both Work for them and against them, but principally against them in terms of right structure. So, yeah, look, I think there's, you know, there's a number of of our peers have got a lot of rigs to reactivate. You know, we're not in that position. Thankfully. We've pretty much fully contracted with 1 or 2 swing assets that we can bring back to the market. If we get the right commercial terms, we're not going to do that on a speculative basis. So I think we're confident in the development market, and we think that will overcome any near-term headwinds.
spk02: That's very helpful. And just as a follow-up to that, have you noticed in your own discussions with clients versus where, for example, where you were six months ago, how have the other TNCs of the contract structures changed in addition to just day rate? going a bit up?
spk00: Well, I think you have to ask in order to be served. So what I would say is I don't know if they've started offering massively different terms. I think the most obvious thing that we've seen is an understanding that they need to be much more flexible on intake windows and things of that nature and that they have to plan further and further ahead. Insofar as the contractual T's and C's are concerned, I mean, really, that's, you know, requires adult behaviour on the part of the people operating the market. And, you know, certainly for us, you know, our concerns with, you know, things like supply chain inflation and the potential for, you know, country specific changes. in operating costs. We're very focused on protecting margins. We're very focused on protecting against changes in law and currency controls and things of that nature. But you have to positively ask the customer to address those kind of issues. And that's a little bit that we hope will separate us from some other players. We're not losing sight of the contractual ask We're looking to expand on that part of the commercial bargain. Through time, that's proven to be far more important than a day rate that exists for a moment in time. All right.
spk02: Thank you so much for all your comments. And again, congratulations on completing the acquisition.
spk00: Thanks very much, Frederick. Have a great day.
spk01: Our next question comes from Hamad Khorsand from BWS Financial. Your line is open.
spk07: Hi. So the first question I had was, is there any plan or any strategy behind some of the assets you've gained from AquaDrill? And if you're looking to monetize them in any way, does it fit the larger profile what you see SeaDrill as in the next three years?
spk00: Yeah, absolutely. Fleet compositions and active discussion within the management group on the board at the moment. So, as you rightly point out, we are acquiring a number of rigs through Aquadrill that aren't sort of what I consider to be core assets in the Formula 3 tender assist rigs. Through time, recently here, we've reduced our exposure to the jack-up space as well. We still have three units that are leased to Gulf Drill JV and are on contract for the next couple of years with staggered expiration dates. And we have a stacked unit as well. So I think increasingly as we go forward, you can see a shift in our focus to units that are basically focused on the ultra deep water and the harsh environment space. But we're in no rush also to sell those assets that have come to us either through acquisition or have been a part of our original fleet. We're only going to divest them if the terms are attractive to us, frankly. So we're going to be looking at opportunities there, both to kind of clean up the fleet that we've got to make for a more consistent and asymmetric profile. But then we're also looking at opportunities for expansion as well. So, you know, we continue to look around for assets that might be available on a one-off basis or where they might make sense in our fleet and not in somebody else's. We have a lot of active discussions across the space there. So, yeah, we're looking to have a more, shall we say, a less wide-ranging profile across the fleet going forward. But it'll take some time to achieve that and constant surveillance and financial discipline and how we transact around achieving that outcome.
spk07: Okay. And my other question was regarding those
spk04: synergies that you've highlighted in the past uh how fast could that develop as the biggest portion of those synergies coming from you know you moving away from the management contracts that aquadrill has yeah that's right look i think uh so we've we've talked about 70 million dollars annually the vast majority of that is in relation to the msas aquadrill as i think almost everyone knows has only a small group of employees with small office space, so the G&A synergies are approximately $10 million or so of that 70, and then the rest is MSA related. Those MSAs base cases, they continue with the current managers until the existing contracts expire, and then we'll take over. And those are generally within the next year, and in some cases slightly more than a year, but by you know, in the next by two years time, that will be fully realized.
spk01: Okay, thank you. As a reminder, to ask any further questions, please press star one on your telephone keypad now. We now turn to Matt Poliak from Hummingbird Capital. Your line is open.
spk05: Hey, good afternoon, guys. Thanks so much for taking the time. Just wanted to kind of go down the linear logic path here. If you wouldn't mind, obviously some of your peers have come to the debt market and it seems like there's a window open here. Could you just talk about the puts and takes of shareholder returns versus allocating capital to potentially stranded assets? And weigh that again, sort of the perceived secondary risk that there is post post deal close here.
spk00: Yeah, okay. Well, I can start off that and then maybe grant let some some color, but. Look, I think the key thing I understand is that we're fully contracted at present and we don't have a lot of. iron on the sidelines that is, you know, going to massively distract us from, you know, delivering operating days. So really what we're trying to do is if you take the view as we do that there's not going to be any new building in the sector for the foreseeable future, you know, at some point it makes sense to, if you can obtain access to them or on some kind of optional or committed or staged basis, At some stage, it makes sense to look at those new assets. And I think the way that the market has developed in the last 12 months, looking forward the next 12 months, I think that there's a case to say that there is room for a little bit more aggressive behaviour if you're at the fully contracted end of the spectrum, which we clearly are in terms of not having too much residual stack capacity waiting to come back to work. So, that's how we kind of think about it is, you know, what might look a little bit sporty today. In the very near future, you know, looking backwards might look like it was a much more interesting approach.
spk05: Does that does that answer your question that well, I guess I was really kind of asking about the puts and takes of of. Utilizing capital to spend on stranded assets versus. Shareholder returns and thoughts around. buybacks or dividends and whether or not there's room for both because you guys obviously alluded to shareholder returns as well pretty heavily.
spk00: Yeah, well, we think there's room for both. I think the key thing to understand is we're not going to throw capital around on a wholesale basis. We're going to be looking on a selective opportunistic basis where we think there's good value. In so far as it relates to capital return, I think we've communicated pretty loudly that that is going to be an essential part of our proposition to the market. But we really need to get this Aquadrill integration out of the way first. And you'll see us promulgating some firm positions on what we might do there in conjunction with the board as we get towards the end of this year. We're not able to do that just now.
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